If you are planning to complete your own income tax return for your rental property, below are 5 common pitfalls to ensure you avoid along the way.

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Valid PRTB registration

MORTGAGE INTEREST PAYMENTS CAN ONLY BE CLAIMED AS AN EXPENSE ON A RENTAL INCOME TAX RETURN IF YOU HAVE A VALID PRTB REGISTRATION IN PLACE.

 

Remember that you are required to periodically renew your PRTB registration even if you do not have a change in tenancy. If you do not have a PRTB registration in place or are unsure if an old one is still valid, please contact PRTB for assistance. Their website is www.prtb.ie and phone number is 0818 30 30 37.

 

In the event of a Revenue Audit of your income tax return, you will be required to produce a copy of the PRTB registration document. If you cannot produce this or otherwise provide confirmation that valid PRTB registrations were in place, Revenue will usually disallow the mortgage interest you have claimed on your tax return. As mortgage interest is the largest cost for most property owners, this can work out to be an extremely expensive adjustment. Don’t forget that interest and penalties would apply on top of this also.

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Mortgage Interest

YOU ARE ONLY ENTITLED TO CLAIM 75% OF YOUR ANNUAL MORTGAGE INTEREST.

 

It is a common mistake for people to claim the full amount of interest. Again, as mortgage interest is the largest cost for most property owners, this can work out to be an expensive mistake if adjusted for by Revenue during an Audit of your income tax return.

 

Your mortgage provider should issue you with a mortgage interest certificate at the end of each tax year which confirms the total amount of interest charged in the year. Note that sometimes this information is contained as a summary at the bottom of an annual statement and is not actually shown on a separate certificate.  In the event of a Revenue Audit you will need to be able to produce this certificate/statement as backup for the amount of interest you have claimed.

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Repairs and Maintenance Costs

vs.

Purchases of Furniture & Fittings

IT IS IMPORTANT TO CLASSIFY THESE EXPENSES CORRECTLY AS DIFFERENT TAX TREATMENTS APPLY TO EACH TYPE.

 

Unless you get very lucky, it is likely that repairs and maintenance costs and the replacement of items of furniture and other fittings such as washing machines will be an ongoing issue for most landlords. Claiming the tax deduction for these costs correctly is therefore important to manage.

 

Expenses which can be claimed under repairs and maintenance should relate to the cost of general repairs and ongoing upkeep of the property. For example, decorators, plumbers and replacement parts for existing fixtures and fittings already in the property. You can claim the full cost of these as a tax deduction in the year in which the cost was incurred.

 

The purchase of new furniture and other fixtures and fittings however cannot be claimed under repairs and maintenance. For example, beds, tables and washing machines. Instead you must claim tax relief on these expenses via a capital allowances claim.

 

Capital allowance tax relief is a particular way of claiming tax deductions on the cost of furniture and other equipment and fittings. Instead of receiving the full tax deduction for these in the year in which you purchase them, you are instead entitled to claim 12.5% of the cost of these each year for 8 years. If you sell, dispose of, or replace the item before 8 years, you are entitled to claim the balance of the cost which has not yet been claimed when you prepare your rental income tax return for that year. Capital allowance claims have their own separate section to be completed on your income tax return.

 

A full article explaining how rental capital allowances can be calculated and claimed, will be posted here soon so don’t forget to check back regularly for updates or to subscribe to our blog or newsletter to be notified of new articles.

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Expenses

CERTAIN RENTAL INCOME RETURN EXPENSES MUST BE TIME APPORTIONED BEFORE CLAIMING ON YOUR TAX RETURN.

 

The tax year runs from January to December. However many expenses that you incur may not run in line with these dates.  For example, annual management fees on the property may be charged on a different year basis such as from March to February. Another common example is insurance e.g. you may have a policy which covers the period October to September.

 

If you pay management fees or insurance on your property and the period covered by these fees do not coincide with the tax year, you must time apportion the fees. This is required so that you only claim the portion of the cost which relates to the income tax year that you are preparing a  tax return for.

 

Example

You pay management fees of €1,000 for the period March 2012 to February 2013 and €1,100 for the period March 2013 to February 2014.

 

You would calculate the total management fees for your 2013 rental income tax return as follows:

 

€1,000 x 2/12 (being the two months of the €1,000 fee which relate to 2013)

Plus €1,100 x 10/12 (being the ten months of the €1,110 fee which relate to 2013)

 

Total management fees for 2013 = €1,083.33.

 

The same principal applies to your insurance policy and any other cost which relates to a period of time covering more than just the tax year of your rental income tax return.

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Starting or Finishing as a Rental Property during the Year

CERTAIN RENTAL INCOME TAX RETURN EXPENSES SHOULD BE TIME APPORTIONED WHERE THE PROPERTY IS LET FOR THE FIRST OR LAST TIME DURING THE YEAR.

 

If you rented your property for the first time in the year or if the property permanently ceased to be a rental property during the year, you must time apportion relevant expenses accordingly. For example, if you started to rent your property for the first time in April, you could only claim for 9 months worth of expenses such as mortgage interest payments and management fees.

If you made the mistake of claiming a full year’s worth of mortgage interest when the property was not actually a rental property for the full year, this again could work out as an expensive adjustment in the event of a Revenue Audit.

Don’t get confused with standard periods of vacancies in between tenants for example. It is normal that a property may not be let on a continuous basis at all times. The property’s status remains as a rental property at this time and expenses incurred during these periods are still generally allowable. It is only when the property becomes a rental property or ceases to be a rental property that this rule applies.